Wall Street shrugs off Chevron verdict

Ruling in Ecuador court has little effect on share price

By

SteveGelsi

NEW YORK (MarketWatch) — While an $8.6 billion ruling against Chevron Corp. could amount to about $4 a share for the blue-chip oil company if it were forced to pay, the company’s stock has traded in line with the broad energy sector in the past two sessions since the potential fine was announced.

Although the ruling in the decades-long battle over pollution in the Amazon rain forest in Ecuador could be one of the largest ever in an environmental case, Wall Street is mostly shrugging it off.

Shares of Chevron
CVX, -1.18%
slipped 0.6% Tuesday, in line with a 0.7% drop by the NYSE Arca Oil Index
XOI, -1.35%
On Monday, when the judgment was announced and Chevron vowed to fight it, the stock rose 1.3%.

Analysts pointed out that Chevron no longer has any assets in Ecuador that the government could seize as payment, since Texaco closed up shop in the South American country before its purchase by Chevron in 2001.

The plaintiffs would then have to attempt to get payment through international trade proceedings, which could take years.

“I don’t think there will be a payout by Chevron,” said Pavel Molchanov, an oil company analyst for Raymond James. “The verdict is meaningless after a legal process that has been so tainted by impropriety, including corruption and bribery. It’s impossible to take this verdict seriously.”

The roots of the legal battle go back to 1965, when Texaco Inc. began operations in Ecuador. It pulled out of the country in 1992. After the plaintiffs attempted to sue Texaco in New York in 1993, the defendant — first Texaco and then Chevron — successfully won a bid to move the lawsuit to Ecuador, at a time when the government there was seen as more pro-business for U.S. companies.

In 2007, President Rafael Correa, who publicly supported the plaintiff’s suit, took power.

The judgment in the case in Lago Agrio Court ordered $5.4 billion for tainted soil, $1.4 billion for health care, $800 million to treat sick people affected by the pollution and $600 million to fix water sources.

In a brief statement, Chevron said the judgment is “illegitimate and unenforceable” as well as “a product of fraud” and “contrary to the legitimate scientific evidence.” The San Ramon, Calif., oil major said it would appeal the decision in Ecuador.

Pablo Fajardo, the lead attorney representing the indigenous tribes in the suit, said the judgment “affirms what the plaintiffs have contended for the past 18 years about Chevron’s intentional and unlawful contamination of Ecuador’s rain forest.” The statement was released by the Amazon Defense Coalition.

In recent months, the potential damages in the suit have increased to more than $113 billion from earlier figures of $27 billion, Chevron said.

In the latest flurry of legal action, Chevron won temporary injunctions in both a U.S. District Court in New York and the Permanent Court of Arbitration in the Hague to keep Ecuador from enforcing the verdict.

Other maneuvers included a civil lawsuit by Chevron under the Racketeer Influenced and Corrupt Organizations Act, or RICO, against the trial lawyers and consultants leading the litigation.

Chevron said the RICO claim stems from “pervasive misconduct” by “American trial lawyers and their allies” who are directing the lawsuit.

Michael Kay, an oil analyst with S&P Equity Research, said Chevron has been saying for more than a year that it expected an adverse ruling in the local Ecuador courts.

“We expect an enforcement case in the U.S., focusing on procedures of the Ecuadorian courts, to come to a much lower settlement,” said Kay, who reiterated his strong buy rating on the stock.

Phil Weiss, an analyst with Argus Research, said the legal wrangling over Ecuador has become increasingly complicated.

“It’s been going on for a long time and I suspect it’s going to be going on for longer,” he said. “Chevron said [the $8.6 billion settlement] is not appropriate, and the other side said it’s not enough. It doesn’t sound like there’s any basis for an agreement. This whole thing is such a mess.”

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